Living Economics

The peer-to-peer rental and sharing economy could lead to more efficient allocation of scarce resources and a cleaner economy.

Most car owners drive to work by themselves with at least 3 vacant seats in their cars. Wouldn't it be nice if they could pick up a ride for a "donation"? Similarly, most home owners have spare rooms in their homes. If they could rent out their spare rooms for $50 or more a day to some guests, the rental income could help significantly towards their monthly mortgage notes.

Before the internet age, these arrangements were difficult to make. The transaction cost of matching supply and demand was prohibitive. Only taxi companies and big landlords could handle these transactions because of the regulatory and liability burdens involved.

But the internet connected with GPS-equipped cell phones has overcome many of these hurdles. Before you accept a ride from a stranger, the ride app provides you with the "character reference" of your potential rides. Your rides could also see your "character reference" before they request a ride from you. Mutual rating thus greatly extends the circle of supply and demand. The internet also makes it easy for the middlemen to take a cut of up to 40% for matching supply and demand.

The most notable of these short-term informal peer-to-peer sharing middlemen are Lyft in ride sharing and AirBnB in room sharing. AirBnB offered 250,000 rooms in 30,000 cities in 192 countries as of early 2013. 2.3 million guests used the service in 2012 alone saving a bundle of hotel expenses (Economist 3/9/2013).

These savings, however, represent a diversion of business from taxi companies and hotels and a loss of potential taxes for the government. The affected businesses are understandably upset about such underground competition. They try hard to stifle such competition by forcing these disruptive upstarts to observe the same regulations.

If these upstart competitors survived such legal challenges and still remain profitable, the implications for resource allocation of a peer-to-peer sharing economy would be immense. Sharing access instead of outright ownership would reduce the number of capital goods needed and hasten the amortization of the ownership costs of those still sold. Old capital goods could thus be retired earlier making room for new capital goods embodying more resource-saving and cleaner technology.

Easier access to capital goods without owning them would also free up resources and reduce pollution from reduced usage. Drivers who give up their cars and switch to Zipcar save an average of $600 a month. Car sharers report reducing their vehicle miles traveled by 44%. And surveys in Europe show reduced CO2 emissions by up to 45% per user (CNNMoney 8/27/2009). The car-sharing concept of Zipcar is duplicated by a peer-to-peer car sharing program offered by RelayRides (Economist 4/22/2010 and CNNMoney 6/20/2012).

Coase (1937) thinks that firms are formed to reduce transaction cost. Thus, internally conducted functions would be outsourced if transaction costs were lowered. In terms of the sharing economy, ownership could be viewed as a firm. When transaction cost of access is reduced, there is less need for ownership.